The warning that smaller lenders may be forced to stop all new lending came at a summit between bosses of banks, building societies, leading city firms, the Prime Minister Gordon Brown and cabinet ministers yesterday at 10 Downing Street.
Bosses at Barclays, Abbey, HBOS, Nationwide, Royal Bank of Scotland and several other banks including Morgan Stanley and Merrill Lynch discussed with the government potential measures to try to resolve turmoil in the money markets.
It is now understood that the government will accelerate talks with the Bank of England on potential measures.
These could include swapping mortgage-backed securities for government bonds with lenders for a period of up to three years.
The Bank of England says it is now weeks away from intervention.
A spokesman for the Bank of England says: “It is no secret that we have been talking to the banking sector about some sort of resolution and that still stands. It will be weeks rather than months before an announcement is made – these kind of things can’t be resolved at the drop of a hat.”